Despite the ongoing challenges of diminished margins and high rental costs, the GCC’s major IT and consumer electronics (CE) retailers are confident of achieving considerable growth in 2011.

After a forgettable 2009, the GCC’s major IT and CE retailers got back on track in 2010, achieving moderate growth in sales, which has continued into 2011 on the back of improving economic conditions in the region’s two biggest markets, Saudi Arabia and the UAE.

Saudi Arabia has taken the lead in this respect, reporting an impressive increase in sales revenues of 43.7% in the first quarter of 2011, according to recent research published by retail analyst GfK Retail and Technology.

According to the GfK TEMAX report, the three most important sectors in terms of sales were telecommunications, contributing SAR 3,143 million ($838m) to the total market, consumer electronics (CE, SAR 1,465 million, $390m), and information technology (IT, SAR 1,316 million, $350m).

The biggest growth in value terms in Q1 2011 compared to Q1 2010 was seen in the largest sector, telecommunications (68.5%), followed by CE, which rose by 38.5%. The IT sector reported growth of 22% during the same period.

In the UAE, overall sales growth across the three main categories was limited to just 3.6% during Q1, despite sales growth of IT goods topping 22.4% during the period compared to the same quarter last year. Across the three sectors, IT sales contributed AED974 million, ($265m) telecommunications AED890 million ($242m) and CE AED724 million ($197m).

According to the GfK report, desktops, notebooks, keying devices and pointing devices continued the positive trend demonstrated last year, with each demonstrating double digit sales growth in the first quarter in the UAE.

“Notebook sales were particularly buoyant, with new product development a key driver of this category, growing by more than a fifth this period in comparison to the first quarter of last year,” GfK noted. “Monitors, on the other hand, performed negatively during Q1 2011 in comparison to Q2 2010, with a double digit decline.”

Smartphones continued to prove a key sales driver, accounting for a large proportion of revenues generated in the telecommunications category. Anecdotal evidence from the region’s major retailers supports these findings.

“From a technology standpoint, the move and adoption of smartphones and tablets has probably been the most significant shift we’ve witnessed lately,” says Ashish Panjabi, COO of UAE power retailer, Jacky’s Electronics. “ In value terms, we’ve already had a few months where smartphones have exceeded traditional mobile phones in terms of sales and tablets have emerged from nowhere to today contributing anywhere between 10-14% of our total IT sales this year.

“What we’ve also witnessed is the lifecycle of these products has gotten shorter as consumers are replacing them more often. This is especially true in the case of smartphones and tablets, where we’ve seen many products replaced at least once and often twice annually.

“The same trend holds true for other categories, such as netbook and notebook computers. Consumers are more likely to upgrade as newer products become available,” he adds.

Deepak Khetrapal, CEO of rival UAE power retailer, Jumbo Electronics, agrees. “Sales of smartphones and mobile phones continue to show no signs of slowing,” he says. “[We are] typically seeing customers upgrading their handsets every six to ten months. There has also been a strong demand for flat screen televisions. Jumbo’s biggest sellers have been 46”and 50”+ LED TVs with rising sales of 3D LED TVs.”

Khetrapal also backs up GfK’s findings that sales of CE goods in the UAE have proven a primary driver for the channel overall. “Last year was a positive year for the CE market in the UAE and the trend is continuing in 2011,” he says. “Major factors driving sales this year are a rise in consumer confidence and the increasing number of tourists visiting the UAE. We had a great start to the year with the Dubai Shopping Festival and have similar expectations for Dubai Summer Surprises. “

Despite these positive signs of growth, distributors and retailers expressed serious concern over the ever-increasing pressure being placed on margins and the ongoing challenge presented by high retail rental rates, particularly in the UAE.

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“The main challenge right now has been managing rentals and margins,” confirms Panjabi. “Even though the UAE has been in a recession in the last few years, there has been virtually no reduction in retail rents. Rather, most of our rental costs have increased during this period. At the same time, we’ve also seen product prices depreciate rapidly, which has also impacted the absolute margins we have earned per product.

“This has meant that we have had to be more prudent in terms of locations we operate from and work on generating volumes if cost structures and revenue structures are to balance,” Panjabi adds.

Kishan Deepak Palija, managing director of Geekay Group, which operates the Geekay Games retail chain, also sees the high cost of rental as an issue for the UAE. “In the UAE, rental costs are one of the major challenges that we face,” he says. “Most businesses would agree that in spite of the global downturn, shopping mall rentals are still very high across the GCC.”

“Due to increased competition and the price of goods dropping, consumers are getting better value for money,” adds Khetrapal. “Retailers on the other hand are seeing reduced margins in their sales and are focused on selling higher volumes.”

Regular price wars among the retailers have also done little to help the situation. Asim Saud AlJammaz, vice president of Al-Jammaz Distribution, one of Saudi Arabia’s largest value-add IT distributors, says the shifting market dynamics towards power retailing is exacerbating this issue.

“Price wars are a losing game for everyone,” he says. “Power retailers are stealing market share from smaller retailers, which is forcing the latter to focus on the SMB sector to survive. Some retailers do not have a clear vision of how to grow their businesses and provide value to customers, so they chase easy product sales that might generate volumes but adversely impact margins.”

AlJammaz argues that this cycle creates other challenges, particularly in regards to the relationship between distributors and retailers. “Many retailers are forced into a credit hold situation because of bad payments, which leads to them losing out on sales opportunities when supply lines are halted,” he explains. “The main challenge is the lack of professional people who understand the retail business and how to run it the right way.”

While online sales channels would seem a panacea to the challenge of high rents, the majority of retailers surveyed for this article argue there are a number of roadblocks to success online, not least of which is GCC consumers’ unwillingness to embrace e-commerce services.

“Online sales in the consumer electronics industry is quite nascent in this region as people still like to touch and feel a product before they make a purchase,” says Niranjan Gidwani, deputy CEO of distributor and retailer Eros Group. “Also, the price benefit of buying online is still not appealing enough to make inroads with consumers.”

“Traditional brick and mortar channels still drive significantly more volume than online channels at this stage but online channels are great avenues for sharing knowledge in the pre-sales process,” says Panjabi, adding that Jacky’s maintains an online sales presence both independently and in conjunction with e-commerce site Souq.com.

“There has to be a critical mass and a more affordable payment gateway in place if online sales are to grow,” he continues. “When we’re in an industry that works on single-digit margins, paying more than half of your margin to an online payment gateway means you’re actually selling at a loss.”

Despite the various challenges facing the region’s IT retailers, many are still confident that substantial growth is an achievable target in 2011. “We are pursuing 25% growth for our business this year compared to 2010,” says Gidwani. “With our current expansion focused on logistics, our product portfolio and retail space we are confident of achieving our goals.”

“As mentioned, consumer confidence and public spending have grown which is an extremely positive sign for us going into the second half of the year,” says Khetrapal.

“We began 2011 on a bullish note with 25% growth in sales during the Dubai Shopping Festival and look to continue that performance through the summer with Dubai Summer Surprises. We have an exciting line up products planned for the next few months that will further boost sales and generate traffic to our retail outlets.”